Michelle Maynard, Partner at Carbon Accountants and Business Consultants, discusses the ATO’s latest focus on everyday working individuals. Predominantly the ATO targeted the “big end of town”, but has set aside $130.8m in the last Federal budget to focus on “individuals not in business” a.k.a. the everyday working Australian, she writes.
This is because the ATO estimated there was a $8.76 billion tax gap in the 2014-15 year from what they collected, to what they should have collected if all individuals not in business were fully compliant. This is compared to the estimated gap from Large Corporates of $2.5 billion. You can see why the focus has changed from the big boys to the little guy.
This gap comes from 3 main areas:
- Deductions for work related expenses
- Omitted income (cash economy)
- Rental property expenses
In 2017-2018 the ATO contacted 140,000 taxpayers where their work-related deductions were higher than expected compared to their peers. By questioning these taxpayers, the ATO recovered $43m in revenue. These were tax returns prepared through agents. A further $24m was recovered by questioning those who lodged themselves through MyTax. Around 7 out of 10 returns had errors or omissions.
So what are the rules around work related deductions?
- You must have actually incurred the expense and not be reimbursed for it.
- There is no such thing as a standard deduction. You can’t just claim 5,000kms because you don’t need a log book, or total work-related deductions of $300 because you don’t need receipts. If you claim $150 in laundry costs – you must have a uniform or protective clothing requirement for your role. The ATO is watching this closely.
- You need to have actually incurred the expense and be able to prove to the ATO that you did. In 2016-17, 3.75m people claimed work related travel totalling a deduction of $8.8m. So, it’s evident why the ATO is focussing on this – the rules about being able to claim work related car expenses are tight.
- A good way to check that your travel claim relates to your work is to ask yourself – did your employer require you to do that travel as part of your duties, or did your employer require you to transport bulky tools or equipment to and from work?”
- The claim must directly relate to your income – the ATO has been known to contact your employer to seek clarification around work use of personal assets (car, telephone etc)
- You need records to prove it. And keep them for 5 years.
What are the ATO watching when it comes to rental properties?
- Interest claims – the ATO are paying attention to interest claims to ensure interest is only being claimed on the rental property. Not personal borrowings or main residences.
- Apportionment of rental income and expenses – where the property is jointly owned the income and expense must be correctly apportioned between the owners.
- Holiday rentals – the property much genuinely be available for rent to claim 100% of the expenses. If the property has been used personally or rented to related parties (either at reduced or no rent) then the expenses must be apportioned for these periods.
- Newly purchased rental properties – The cost to repair or renovate the property, for issues that existed at purchase, cannot be claimed as an immediate deduction. The ATO will be watching these claims to ensure they are depreciated properly.
What should people know?
- The ATO is using data matching, employee codes and standards, as well as more sophisticated technology to catch people out. If you haven’t incurred the expense, or can’t substantiate it – don’t claim it!
- Air BnB supports plans to hand tax information about payments to its users directly to the ATO – so if you are renting your property the ATO may soon know about it
- Be wary of advice that you can claim “standard deductions”. The ATO has reiterated there is no such thing, so if your Accountant is trying to convince you to claim something you haven’t incurred, you will wear the consequences, not them!
Michelle Maynard partnered with Carbon in 2017, bringing a wealth of experience in accounting and bookkeeping. Her extended suite of services covers everything from tax accounting, planning and estimates, to cloud integration, payroll and SMSF. Michelle started her career as a cadet in the Australian Taxation Office, then as a graduate at PwC. Before joining Carbon, she was a manager at PKF, bringing a wealth of knowledge and experience to the team at Carbon. Michelle specialises in providing tax and accounting advice to SMEs and HNWIs and their family groups, working to achieve the most effective strategies for them, both financially, tax effectively, and to help achieve their desired lifestyle. You can contact Michelle at Michelle.firstname.lastname@example.org or connect via LinkedIn